Nissan unfolds new roadmap

CBS.MarketWatch.com

TOKYO (CBS.MW) -- After trying for most of the decade to drive out of the breakdown lane, Nissan Motor Co. has unveiled its most ambitious restructuring program -- and one of the most aggressive the global auto industry has ever seen.

It took an outsider to deliver an honest diagnosis and a painful pill. If the cure results in Nissan's "revival" as intended it'll be all the more impressive, for what's really at stake is the world's fourth biggest automaker's survival.

Carlos Ghosn, who played a pivotal role in restructuring Renault SA, came to Nissan shortly after the French auto company took a 36.8 percent stake in Nissan nearly six months ago. As Nissan's first non-Japanese chief operating officer, Ghosn on Monday laid out a radical roadmap for the next three years.

The so-called revival plan includes: slashing Nissan's manufacturing capacity, workforce, supplier network and dealerships; overhauling the product line; restoring financial health by halving net debt; and reshaping management structure and practices. Ghosn, who has been dubbed "le cost killer," points out that the strategy is not his alone, but stems from the input of 400 proposals from 200 Nissan people in Japan, Europe and the United States.

Before the announcement, shares of Nissan
NSANY, +1.09%
tumbled 49 points, or 7.1 percent, to 637. (The Nikkei 225 shed 326.24 points, or 1.8 percent, to close at 17,275.33.) Since Ghosn's arrival, however, the carmaker's stock has risen well over 40 percent.

U.S.-listed shares of Nissan Motor Co.

"Nissan is in bad shape," said Ghosn, ticking off some awful trends for a packed press conference. The company's global market share has fallen to 4.9 percent from 6.6 percent in 1991. Production has fallen by 600,000 cars over the same period -- a figure that Ghosn said is 25 percent more than the sales of Volvo cars last year. Most seriously, Nissan has chalked up net losses in six of the last seven years, and is forecasting more red ink in the current fiscal year through March 2000.

Paving the turnaround to profitability will start with deep job cuts, Japanese-style, meaning virtually no sudden firings. Nissan's target headcount three years from now is 127,000 -- a reduction of 21,000 jobs, or 14 percent of the total workforce, that will come through attrition, early retirement, spinoffs and a shift to part-time and flex-time employment.

Nissan's factories and dealerships in Japan will bear the brunt of these job cuts. Three plants will be closed by March 2001 and two engine facilities shut by March 2002.

As a result, manufacturing capacity will shrink 30 percent to 1.65 million vehicles -- but that compares favorably to today's annual output of 1.28 units, which represents a mere 53 percent capacity utilization. Nissan's target is 82 percent capacity utilization in three years.

Suppliers will have to commit to streamlining as purchasing costs for parts, materials and services that make up 60 percent of a Nissan vehicle's total cost. The suppliers that remain, that is. Ghosn says their number will be cut nearly in half -- to 600 from 1,145 -- as only more competitive suppliers will likely be able to cope with Nissan's target of cutting purchasing costs by an average 20 percent by March 2003

The sales and advertising budget is to be slashed 20 percent, which will involve the challenging tasks of shrinking the dealer network while redefining the Nissan brand.

In total these moves are aimed at slashing 1 trillion yen ($9.52 billion) on a group basis. "While cost cutting will be the most dramatic and visible part of the plan, we cannot save our way to success," said Ghosn. "Product development will be at the heart of Nissan's revival."

Indeed, it has to be because its line-up of some 50 different models has been criticized not only for bloat but for boring design as well.

Some intended refreshments: bringing back the once popular Z sports car line in the United States; completely replacing Nissan's European car range by 2003; leveraging common manufacturing platforms through the alliance with Renault; establishing a contract with one main global advertising company.

The plan for restoring Nissan's finances are no less drastic. The goal is to cut net debt in half over three years, to less than 700 billion yen in from 1.4 billion today.

Nissan has already begun by selling off holdings in Japanese telecommunications companies and spinning off parts makers it owns. The aim is to be free of all non-strategic, non core assets. Ghosn said only four companies of the 1,394 in which Nissan holds shares are considered indispensable for the future. With stakes of more than 20 percent in half of all those companies, that's a lot of equity unwinding on the horizon.

Property and land assets are also up for grabs, although Nissan has decided to keep its Ginza headquarters as the worldwide nervous system for a management that is to become global rather than multi-regional.

It won't be easy to quell worries elsewhere that Tokyo will remain focused more on the Japanese auto market, where recession has been particularly unforgiving to Nissan, rather than international markets. Especially with a plan to streamline the company's U.S. organization coming December 1. Some details emerged Monday, including the closure of New York and Washington, D.C. offices and a major information-systems outsourcing contract to an unnamed supplier.

But some changes in Nissan's management practices will no doubt go down well abroad even as they stir anxiety at home.Performance-based compensation, including bonuses and stock options, will become de riguer. For Japanese managers used to salaries based on seniority and a culture of vaguely shared accountability, a cold wind will blow through their offices unless they become masters of efficiency.

And that's what the revival plan is ultimately about. Management and shareholders now have some very clear goals to judge Nissan's performance. Customers will judge the new cars and vans.

Ghosn said a 200-billion-yen charge will be booked in the current fiscal year for planned job cuts. That'll no doubt result in a downward revision of the carmaker's forecast of a 60 billion yen loss. But Nissan is committing to achieving group net profit in the following fiscal year, through March 2001. Two years after that, its goal is operating profit greater than 4.5 percent of sales, and net debt cut in half.

Market uncertainties, whether swings in foreign exchange rates or downturns in the historically strong U.S. and European markets, could easily cloud this picture. Changes in technology and the actions of Nissan's Japanese and foreign rivals could force more drastic restructuring.

Those are the risks, but a bigger one perhaps is failure of nerve, which Nissan has demonstrated in less ambitious restructuring efforts of recent years. As the proven cost-killer Ghosn acknowledged, "Establishing the plan is 5 percent of the challenge -- 95 percent of the challenge is execution."

Meanwhile, Renault, which has a 36.8 percent stake in Nissan, applauded the company's restructuring plans, which it said will allow Nissan to return to a "sound situation." Renault said the plan will have a $317 million impact on its own second-half results. Shares in Renault were last down 1.1 euros, or 2.2 percent, to 49.90 in Paris.

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